Explaining the struggles of the European middle classes

The middle classes in Europe are struggling to improve their living standards. As this dossier shows, the European middle classes are moving apart and cannot be helped by seeing them as a homogenous group. Some are still moving upwards, but many are not moving at all or are even falling downwards as they struggle to find jobs, get mortgages, and benefit from the welfare state. A divided middle has varying political and economic interests. Therefore, the policy debate on the middle should sharpen its focus and scope beyond the labour market and skills approach. It also must look at policies that allow the European middle to benefit from the rising middle class in emerging economies and from automation, rather than seeing them as a threat.

The middle class was once the backbone of economic growth and political stability. Now in Europe, however, those in the middle are increasingly struggling to improve their living standards. For decades, it was considered normal for each new generation to improve their living and working standards significantly. As a result, the middle increased significantly in size and income after the Second World War. But the economic turndown in Europe since 2008 made it clear that generations of young Europeans can no longer rely on this certainty. Some commentators are referring to a ‘lost generation’ in many European countries.

However, as this dossier shows, the trend of a struggling middle class was not caused by the economic crisis. It was already under way before the crisis started. The size of the middle classes, measured by income level, stabilized or even declined in most European countries after the mid-1990s. They have struggled to find typical middle-class jobs, because better jobs have hardly been created for middle-income groups. And they have become more vulnerable to economic shocks due to economic globalization and flexibilization of the labour market. For a long time, the problems of job mobility and adapting to changes in the labour market were seen as a concern for the lower working classes, but they have now become a reality for the whole middle class.Prior to the financial crisis in 2008, few people were bothered by the increasing ‘squeeze’ of the middle, as the financial sector was able to compensate for it with cheap debt (based on speculative property values), while governments provided benefits. However, the financial crisis was caused partly by cheap debt and resulted in welfare cuts in developed countries. This spotlighted the fact that such forms of compensation can no longer hide the structural problems behind the state of the middle class. What is happening is that large groups associated with the middle class in post-war advanced economies cannot benefit from the economic dynamics in booming economic sectors. Rather, they are facing international competition, reduced negotiating power and lower investments in the productive sectors. Social protection is declining. And while housing prices have fallen in most parts of Europe in the last six years and are not expected to rise significantly in the years to come, it is more difficult for first-time buyers to get mortgages. Some scenarios predict even more pressure on the middle due to increasing automation and robotization.

What this dossier reveals is that middle-class groups in Europe are not all in decline. Some are still moving upwards, but many are not moving at all or are even falling downwards as they struggle to find jobs, get mortgages and benefit from the welfare state. Although they all face the same international threats of globalization and automation, and national pressures on social protection and the welfare state, who benefits and who does not varies widely and divides the middle.

The global middle class

At the same time, income levels in many emerging economies are transforming dramatically. The number of people in the developing world living above the absolute (moderate) global poverty line of US$2 a day has doubled since the early 1990s, while almost half of the developing world’s population earns between US$2 and US$13 a day, according to economists Martin Ravallion and Andy Sumner. In the literature, this phenomenon is referred to as the rise of the ‘new middle class’.

Those above US$10 and below US$100 a day are referred to as the ‘global middle class’, and are steadily growing in emerging economies. Around the world this group is expected to grow by up to another three billion in the next two decades, making it the largest global income group. What is happening here? Is the proclaimed decline of the middle in advanced economies related to the rise of the new middle class in the developing world? What are the underlying causes of the both trends? Will there be an opportunity to create jobs in developed countries due to the rise of global middle class in other parts of the world? Or will automation reduce this opportunity? This dossier seeks to answer these questions from the perspective of the European middle classes.

Objective

The aim of this dossier is to provide an overview of international trends that pose threats and present opportunities for the European middle classes. Although the focus is on the European context, to provide a good overview of the global trends that impact on this group, it is important to connect the knowledge of the European context with theory and research on middle-class development from all around the world. In the literature, there is an increasing interest in the rising middle classes in emerging countries. And much research has also focused on the squeezed middle class in the United States. But what is happening in Europe? How are Europe’s middle classes developing differently than their counterparts in the United States and emerging countries? And what are the differences within Europe itself?

The dossier will seek to answer these questions by looking at the three main drivers behind the dynamics of the middle class: economic globalization, automation and social policies. Economic globalization (e.g. trade openness and financialization) and technological change (automation) are significant international forces that present opportunities for some but not for all groups in society. Social policies on the other hand can help the middle class adapt to new circumstances and prevent them from falling back into poverty. In general, policies that affect the middle class can be classified as redistribution (tax credits, benefits, pension funds, social protection, cash transfers) or predistribution (through inclusive growth and systemic change).

Together these three drivers will impact on employment opportunities and inequality. As such, this dossier is a continuation of previous dossiers on Inequality and Employment in which The Broker already identified main international trends that affect the creation of employment and quality jobs, and increase income inequality in most parts of the world, combined with the debate on equality of opportunities. This dossier goes further by focusing on trends affecting the middle classes, particularly in Europe. And it gives some important policy recommendations on how to tackle the trends.

Core articles

Who are the 'middle'?, by our editor Josefine Ulbrich, shows the numbers behind the decline of the middle classes in Europe. Depending on how the middle is defined and measured, the outcomes are quite different, but the overall conclusion is that the middle classes in Europe are struggling and even declining in some countries. This article gives an up-to-date overview of the state of the middle in Europe and compares it with its counterparts around the world.

Making globalization work for the European middle class, by our editor Evert-jan Quak, looks at the occupations of the middle class. New jobs have mainly been created for the lower and the upper segments of the labour market, but less or even not for the middle. And because most of those jobs are in non-tradable sectors with low productivity growth, this trend also threatens long-term economic growth and increases inequality. This article examines further the policies that are needed to create more and better jobs for the middle in a globalized economy.

Better skills will not save middle-class jobs from automation, by Jo Michell of the University of the West of England (United Kingdom), is about automation and its impact on middle-class jobs in Europe. Which groups of the European middle classes will be affected and who can benefit? But more importantly, what policies are needed to turn automation into an opportunity for the middle classes? Automation in itself is not good or bad, it is the policy behind it that matters.

A divided middle, by Ursula Dallinger of the University Trier (Germany), focuses on the link between inequality and the middle classes. Dallinger concludes is that it is not only economic globalization and automation that are affecting the European middle. For many decades, the middle was able to profit from social transfers and social protection measures. Now, due to austerity, the welfare state is in decline, which is affecting different groups in the middle class differently. And this has political consequences, as the interests of the middle are more diverse than ever before.

Co-readers

We would especially like to thank co-readers of the core articles: Guillaume Osier (Economist-Statistician at European Central Bank), David Dorn (Professor of International Trade and Labor Markets, University of Zurich), and Niels Beerepoot (Lecturer and researcher at the Amsterdam Institute for Social Science Research of the University of Amsterdam).

We hope you enjoy reading the articles and invite you to comment on them or contribute by submitting an expert opinion.

Photo by Scott Wylie (via Flickr)

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Summary

In Europe the middle classes are increasingly divided and that has political consequences. As those in the middle struggle to improve their living standards, their political and economic interests have moved apart.